Availment by Steel Corp. of Privileges Granted under Sec. 19 of RA 10142 (Rehabilitation of Financially Distressed Enterprises)

May 26, 2011 DOF OPINION 2nd Indorsement Respectfully forwarded to the Commissioner of Customs, Manila, his within 1st Indorsement dated March 8, 2011, in connection with the letter dated October 1, 2010 of STEEL CORPORATION OF THE PHILIPPINES (STEELCORP) requesting that they will be availing of the privileges granted under Section 19 of Republic Act No. 10142, otherwise known as "An Act Providing for the Rehabilitation or Liquidation of Financially Distressed Enterprises and Individuals" , which took effect sometime in September 2010. Records show that on October 1, 2010, SteelCorp wrote a letter to the Commissioner of Customs informing the latter that they will be availing of the privileges provided under Section 19 of R.A. No. 10142, which states: "Section 19. Waiver of Taxes and Fees Due to the National Government and to Local Government Units (LGUs) . Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees, including penalties, interests and charges thereof, due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation." (Emphasis Supplied) SteelCorp claims that since they are undergoing rehabilitation proceedings from the time a Stay Order was issued on September 12, 2006 until the present, although no rehabilitation plan has yet been approved due to the pending appeals in the Court of Appeals and the Supreme Court, the payment of import duties and VAT/Fees on their importations of raw materials cannot be imposed pursuant to the afore-quoted provision. On October 26, 2010, the Legal Service of the Bureau of Customs, thru the Deputy Commissioner for Revenue Collection and Management Group, issued a Memorandum recommending that the Bureau of Customs waive all taxes and fees which are due to SteelCorp. The said recommendation was approved by the Commissioner of Customs, the fallo of which states that: "3. However, Section 146 of the same law states categorically states (sic) : 'Section 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases . This Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending , except to the extent that in the opinion of the Court their application would not be feasible or would work injustice, in which even the procedures set forth in prior laws and regulations shall apply.' (Emphasis Supplied) aTcIEH 4. At first glance, it would seem that STEELCORP is not entitled to the privileges granted by R.A. No. 10142. However, a reading of the aforequoted section shows that the case at hand falls on the second sentence of the abovequoted section. STEELCORP may enjoy the benefits and privileges under R.A. 10142 since its law may be liberally applied in all pending insolvency, suspension and Rehabilitation cases as the title of Section 146 clearly suggests, subject only to the exception provided for in the second sentence of the same section." (Memorandum, p. 2) Hence, this instant review. After a careful examination of the records before us, this Department disagrees with the recommendation of the Commissioner of Customs for lack of factual and legal basis. According to SteelCorp, the company has been undergoing rehabilitation proceedings from the time a Stay Order was issued on September 12, 2006. However, up to the present, no rehabilitation plan has been approved for the company due to the pending appeals in the Court of Appeals and the Supreme Court. Thus, SteelCorp contends that under the new R.A. No. 10142, the imposition of taxes and fees on their importation of raw materials are not only suspended but are considered waived. We beg to disagree. Section 4, paragraph [e], of R.A. No. 10142, states that a Commencement Order shall refer to the order issued by the court under Section 16 of R.A. No. 10142. Thus, the pertinent portion of Section 16 provides that: "Section 16. Commencement of Proceedings and Issuance of a Commencement Order. The rehabilitation proceedings shall commence upon the issuance of the Commencement Order, which shall: xxx xxx xxx (q) include Stay or Suspension Order which shall: (1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and ICAcaH (4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein." (Emphasis Supplied) As above shown, while the issuance of a Commencement Order issued by the court includes Stay Order, the law does not explicitly provide for an automatic entitlement to the tax exemption privileges prayed for by SteelCorp. Besides, Section 19 of R.A. No. 10142 expressly refers to the issuance of the Commencement Order by the court and not the Stay Order. Thus, the Stay Order relied upon by SteelCorp is not the same as the Commencement Order required by law to consider the taxes and customs duties waived. Moreover, the waiver of taxes and fees contemplated under Section 19 does not include the payment of customs duties and fees on the future importation or incoming shipments of SteelCorp. This can be clearly inferred in Section 4 (c) of R.A. No. 10142, viz. : "(c) Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property , whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the government, whether national or local, including taxes, tariffs and customs duties ; and (2) claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities." (Emphasis Supplied) TAEDcS In other words, assuming that the Stay Order is the same as the Commencement Order stated in Section 19 of the Law, the waiver of taxes, tariffs and customs duties refers to such claims already due to the government at the time of the issuance of the Commencement Order. Thus, those taxes and customs duties due on the incoming importations after the issuance of such Commencement Order shall not be considered waived. It is basic that tax exemption is regarded as derogation of sovereign authority and, therefore, must be strictly construed against the person or entity claiming the exemption. In the case of the Commissioner of Internal Revenue vs. Fortune Tobacco Corporation (559 SCRA 160, July 21, 2008), the Supreme Court ruled that: "Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken . The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention." (Emphasis Supplied) Accordingly, in view of the foregoing, the recommendation of the Commissioner of Customs that all taxes and fees due from the importations of Steel Corporation of the Philippines be considered waived is hereby DISAPPROVED by this Department. STIcaE By Authority of the Secretary: (SGD.) CARLO A. CARAG Undersecretary Revenue Operations and Legal Affairs Group